4 out of 10 first-time entrepreneurs fail because they forget one of the basics: following their revenues and expenditure – cash flow. In established companies balance sheets and income statements are king, but for startups, it is all about following the numbers in their account: money coming in and out. It sounds very simple (and it is!), but still, I have seen way too many startups to fail because of it.
Here are the 3 common reasons this happens:
Not checking your revenues & expenditure often enough
Looking at your finances is a tedious task. It’s quite boring, and you already have so many other important things to do. And let’s be honest: only a few of us are excited to look at the row of minus’, which is usually the case at the beginning of the startup journey. Thus we often decide to do it “tomorrow”. And more often than not, the startups notice the warning sign too late.
Being too optimistic
You need to have a bit of crazy optimism when you are an entrepreneur, but not when you are estimating things like your expenses, funding needs and time x, y and z will take. Startups tend to make their estimates only a small portion of what they really are, which makes them very ill-prepared.
But why that happens? It is partly being overly optimistic & part not understanding how startups work. Things rarely work out how and when you want them to, and there are many variables you just can’t predict. The market, competition, and even the customers’ needs will change. As time goes by, you will also start to understand your customers better. All this means you will have to make adjustments to achieve better product-market fit. Startups usually pivot, i.e. change from plan A to plan B (or even to plan Z!) 3-5 times at the beginning. All this take time and money and push the time of your first sale forward. But expenses still start from day one.
That is why it is important to constantly check your cash flow and be realistic about the ‘whens’ and ‘how muchs’. When you do that, you know when you are going to be out of money and still have time to do something about it. It takes 3-6 months to get funding, investments, etc. so I can’t stress enough how important it is to knowing when you are out of money early enough. Too many startups come up to me less than a week before they were out of money and still believed they would magically make it. You can guess what really happened.
Not understanding when the money is actually coming to your account
For some reason, many startups believe that when they sign a deal, their money-related problems will fly out of the window. But that is not how it works. It might take weeks, months if not even years before the money is actually in your account! It all depends on what you agreed. Also, not everyone pays their bills in time. Trust me, it happens more often that you’d think. There also might be other problems delaying payments like dealing with reclamations. But again: your expenses won’t wait. So remember: even though money is coming in, sooner or later, you might be out of money and bankrupt well before that! Ask yourself: when exactly we will get the money, and will we survive till then.
In my next post, I will give you more concrete tips on how to get your time frames and expense estimates close to reality.